A Credit Mechanism for Selecting a Unique Competitive Equilibrium
University of California, Santa Barbara - Department of Economics
Yale University - School of Management; Yale University - Cowles Foundation
Cowles Foundation Discussion Paper No. 1539R2
We show by an iterated process of price normalization that there generically exists a price-normalizing bundle that determines a credit money, such that the enlargement of the general-equilibrium structure to allow for default subject to an appropriate credit limit and default penalty for each trader results in a construction of a simple mechanism for a credit using society to select a unique competitive equilibrium (CE). With some additional conditions, a common credit money can be applied such that any CE can be a unique selection by the credit mechanism with the appropriate credit limit and default penalties for the traders. This will include a CE with the "minimal cash flow" property. Such CEs are special for the reason that they minimize the need for a "substitute-for-trust" (i.e. money) in trade.
Number of Pages in PDF File: 22
Keywords: Competitive equilibrium, Credit mechanism, Marginal utility of income, IOU, Default penalty, Welfare economics
JEL Classification: D5, C72, E4working papers series
Date posted: December 10, 2006
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